Two landmark cases before the High Court highlight the problem of identifying whether a worker is an independent contractor or employee for tax and superannuation purposes.
Many business owners assume that if they hire independent contractors, they will not be responsible for PAYG withholding, superannuation guarantee, payroll tax and workers compensation obligations.
However, each set of rules operates a bit differently and, in some cases, genuine contractors can be treated as if they were employees.
Correctly classifying the employment relationship can be difficult and there are significant penalties faced by businesses that get it wrong.
A genuine independent contractor who is providing personal services will typically be:
Autonomous rather than subservient in their decision-making;
Financially self-reliant rather than economically dependent upon the business of another; and,
Chasing profit (that is a return on risk) rather than simply a payment for the time, skill and effort provided.
Key takeaways:
Every business that employs contractors should have a process in place to ensure the correct classification of employment arrangements and review those arrangements over time.
Even when a worker is a genuine independent contractor this doesn’t necessarily mean that the business won’t have at least some employment-like obligations to meet.
Review the agreements to ensure that the “rights and obligations of the parties under that contract” are consistent with an independent contracting arrangement
Businesses should be aware that some contractors are deemed to be employees for superannuation guarantee and payroll tax purposes.
CFMMEU v Personnel Contracting
High Court overturning the previous decision by the Full Federal Court.
Labor hire contractor was determined to be an employee despite the contract stating he was an independent contractor.
In return, he was entitled to be paid for the work he performed.
The High Court held that despite the contract stating the labourer was an independent contractor, under the terms of the contract, the labourer was required to work as directed by the company and its client.
ZG Operations Australia v Jamse
Two truck drivers were employed by ZG Operations for nearly 40 years.
In the 1980’s the company decided it would no longer employ drivers, rather it would continue to use their services, only if they purchased their trucks and entered into contracts to carry goods for the company.
The two drivers agreed, each setting up a partnership with their wives.
Each partnership: executed a written contract with ZG Operations, purchased trucks, and paid for the maintenance and operational costs of those trucks, invoiced the company for delivery services.
The income was declared as partnership income for tax purposes and split between each individual and their wife.
Overturning a previous decision in the Full Federal Court, the High Court held that the drivers were not employees of the company.
In this case the fact that the workers owned and maintained significant assets that were used in carrying out the work carried a significant amount of weight.